Returns On Capital Signal Tricky Times Ahead For ICARES Medicus (GTSM:6612)

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after briefly looking over the numbers, we don't think ICARES Medicus (GTSM:6612) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

What is Return On Capital Employed (ROCE)?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on ICARES Medicus is:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.099 = NT$77m ÷ (NT$848m - NT$63m) (Based on the trailing twelve months to December 2020).

Therefore, ICARES Medicus has an ROCE of 9.9%. On its own, that's a low figure but it's around the 12% average generated by the Medical Equipment industry.

See our latest analysis for ICARES Medicus

Historical performance is a great place to start when researching a stock so above you can see the gauge for ICARES Medicus' ROCE against it's prior returns. If you'd like to look at how ICARES Medicus has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

How Are Returns Trending?

On the surface, the trend of ROCE at ICARES Medicus doesn't inspire confidence. Around five years ago the returns on capital were 17%, but since then they've fallen to 9.9%. And considering revenue has dropped while employing more capital, we'd be cautious. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

What We Can Learn From ICARES Medicus' ROCE

We're a bit apprehensive about ICARES Medicus because despite more capital being deployed in the business, returns on that capital and sales have both fallen. Yet despite these concerning fundamentals, the stock has performed strongly with a 23% return over the last three years, so investors appear very optimistic. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

ICARES Medicus does have some risks though, and we've spotted 1 warning sign for ICARES Medicus that you might be interested in.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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